Sunday, February 7, 2016

Why The Secular Stagnationists May Be Wrong: Rapidly Falling Solar And Wind Prices

The voices of pessimistic secular stagnationists have been growing louder and louder. Robert Gordon's recent book has been the poster boy recently, emphasizing technological stagnation, productivity slowdowns, and a lack of likely new products of any real value to humans. He and Tyler Cowen focus on the relationship between IT and the rest of the economy, seeing a slowdown in productivity improvements in the economy coming from this important sector. Lawrence Summers emphasizes demand side stagnation, but sees his view as complementary to the supply-side technological pessimism coming from Gordon and others.

A particular reason from the supply-side that these forecasts of increasing stagnation may prove to be oveblown comes from a sector that none of these doomsayers ever mention, but which remains fundamental to the world economy: energy. In particular, both solar and wind energy have been experiencing dramatic declines in costs, which many are projecting will continue in the foreseeable future. For one among several sources on solar energy see Ramen Naam, from August, 2015. Obviously one must take such projections with caution, but this post projects solar costs to be about two thirds of current ones in a decade and about half of current ones in two decades. This is dramatic. On wind a report from the US Department of Energy, also in August 2015, makes no projections, but reports costs in the low-cost interior of the US falling from $70/MWh in 2009 to $23/MWh in 2014. Anything like this continuing would be important. Their prices are now competitive with conventional sources.

Those who see these numbers, or ones like them, but dismiss them, emphasize what a small percentage of current energy comes from these sources (so far mostly useful for electricity production), although in certain locations such as Denmark have more substantial portions relying on them. But, this is the point. If indeed we see dramatic further reductions in costs that put theses sources far lower in cost than current ones, we may well see massive investments in shifting to them that could substantially transform the energy sector of the world economy and the world economy itself more broadly, including allowing for major productivity increases and an acceleration of growth in the real economy, irrespective of whatever is going on in the IT sector or whether wonderful new products that make the indoor toilet look boring and unimportant will be discovered. Producing the same old stuff at much lower real costs can provide a powerful growth stimulus, not to mention that such sources would help substantially in dealing with the climate change problem.

A more sci fi issue is the possibility of getting commercially viable nuclear fusion breakthrough. I am less optimistic on this front, where there have been many false announcements. However, for better or worse, there seems to be a lot of noise on this front about possible breakthroughs, coming from such sources as the International Atomic Energy Agency (IAEA). Thus, the possibility of some major breakthrough in this area could happen, and this could also be a major game changer as well.

16 comments:

"Those who see these numbers, or ones like them, but dismiss them, emphasize what a small percentage of current energy comes from these sources..."

That is a fair description of the emphasis. However, it is not the only issue. The other issues are reflected in the small amount of energy that currently comes from solar and wind.

Those other issues include the immense vested interests of the fossil fuel industries and the trillions of dollars worth of assets in fossil fuel infrastructure and equipment. It is true that massive private and public investments would be needed for shifting to affordable, renewable energy but because of the probable risk/return profile MOST of it will have to come FIRST from public investment. Besides investment, the transition will still require regulatory changes and the ending of subsidies to fossil fuel.

Although price changes may make the transition more politically persuasive, price changes BY THEMSELVES will not bring about the momentous political changes that would be required to wrest the state away from the vice-like grip of the military-industrial-petroleum-finance complex.

To call such a metamorphosis "growth" is a serious misnomer -- a category error. Is the change from a caterpillar into a butterfly "growth"?

According to the book:Sun in a Bottle: The Strange History of Fusion and the Science of Wishful Thinking Paperback – October 27, 2009by Charles Seife we can forget about thermonuclear reactors any reasonable time frame soon.http://www.amazon.com/gp/product/0143116347?keywords=sun%20in%20a%20bottle&qid=1454944479&ref_=sr_1_1&sr=8-1

«The economy you can support from fossil fuels that return 15-20 times the energy invested looks much different from the one you can build on solar at 2-4 times energy invested.»

It is much worse than that, because mineral wood (coal) and oil, especially the latter, are amazingly light (high energy density) and easy to store compared with the alternatives, and they can also provide very high power densities much more easily. Some engineers think that for example hydroelectric power stations could not be built without coal or oil.

«It is tempting to look at dollar costs, but the energy budget will dominate»

There are a couple of technicalities here.

A guy called JB Clark and his accomplices have eliminated from (neoclassical) Economics the concept of "land" as a particular type of capital, with a "fertility" and thus a "rent". This was done to counter arguments that "land" generates "rent" thanks to its natural, intrinsic "fertility" and this windfall should therefore be specially taxed.

Also JB Clark and his accomplices have this reduced all "capital" to a single "jelly", that is to dollars in practice, by using delusional handwaving called the "Cobb-Douglas production function", in order to "prove" the central truthiness of neoclassical Economics, that absent government regulation income is uniquely determined to productivity, which cannot be proven if there are even just 2 different types of "capital".

This makes contemporary Economists pretty much blind to the economics of mined energy, and of the unique advantages of extracting it in nearly ready-made form from mineral sources.

For example R Gordon's argument (of which I have read only a summary) is fatally and let me say grossly and obviously flawed by his misconception that the primary cause of productivity growth is "Great Inventions", when instead it has been the adoption of fuels, coal first and oil later, which are much cheaper and much more energy dense than ordinary agricultural "food".

The driver of a combine harvester is more productive than 50 men with sickles not because the dozer is a "Great Invention" that is far more efficient than 50 sickles, but because the diesel powering it is far cheaper and more energy dense than the bread (and maybe cheese) used to feed the 50 men powering the sickles.

A car is far more productive than a horse drawn cart not because the petrol engine is a "Great Invention" that is far more efficient than a horse, but because its "food" (petrol) is much cheaper and lighter than the "food" (oats) powering the horse.

The great waves of productivity growth have been (nearly) entirely driven by the adoption of better (much cheaper, rather energy denser) fuels, and then, yes, optimizing the machinery using them, machinery that is however not very useful scrap without those fuels.

Seen from a pre-JB Clark point of view coal-fields and oil-fields have been the most fertile land ever discovered, capable of a "food" yield many many times larger and many many times cheaper than the most fertile land of Kansas or Ukraine, a fantastic windfall that has driven down dramatically the price of "food" for the past hundred years. It is this immense windfall that has "proven" both Malthus and Marx wrong.

The problem is that a third great fuel, cheaper and energy denser than oil, has not been found yet, and we have already optimized coal and fuel consumption as far as it is feasible, and the marginal fertility of coal-field and oil-field land is falling constantly.

This is indeed in part made clearer by looking at the energy cost of new energy, but it goes further than that.

I think that our blogger, JB Rosser, sort of understands the above, from his discussion of the potential of fusion, for example, but as an Economist he may not find it natural to use a Classical instead of a neoclassical point of view.

«his misconception that the primary cause of productivity growth is "Great Inventions"»

To demonstrate that this is not a caricature of his argument for example look at this:

http://www.nber.org/papers/w7833«Does the "New Economy" Measure up to the Great Inventions of the Past?»«The paper combines the Great Inventions of 1860-1900 into five clusters' and shows how their development and diffusion in the first half of the 20th century created a fundamental transformation in the American standard of living from the bad old days of the late 19th century.»http://www.nber.org/digest/dec00/w7833.html«Gordon also finds that the computer, telecom, and Internet technologies pale next to the five "great inventions" of 1860 to 1900. Electricity, the internal combustion engine, the chemical and pharmaceutical industries, the entertainment, information, and communication industries, and the rise of an urban sanitation infrastructure defined the Second Industrial Revolution of 1860 to 1900. These innovations not only led to a dramatic upsurge in productivity from 1913 to 1972, but they also changed everyday life.»«Again, the explanation for the productivity gains prior to 1970 lies mostly with the cluster of inventions developed from 1860 to 1900.»

BTW the summarizer (C Farell) also adds a very interesting point:«A complementary explanation is that the closing of American labor markets to immigration, and of goods markets to trade, between the 1920s and 1960s gave a boost to real wages which, in turn, made labor expensive and promoted productivity growth. The post-1972 slowdown in productivity growth coincided with a reopening of labor markets to immigration and of goods markets to foreign trade.»

From my point of view that means that industries chose to use more cheap oil substituting for expensive labour, and then reversed the choice.

From the supply side the big fall in costs has already happened. A variant of Amdahl's Law applies: the residual costs of PV and wind (design and planning, permits, associated infrastructure such as switching, roads and wires, land use costs) were once maybe 10% of the total, but now are over 70% of the installation cost. These residual costs are not falling very fast, so even if PV panel costs fall by 50% a year the overall cost can't fall as quickly as it did any more.

From the demand side, diminishing marginal utility rules. Electricity just isn't that important to growth any more. There are at least two aspects to this.

In the advanced economies, per-capita electricity consumption seems to be declining; in China, the trend rate of growth is declining and its consumption will peak in a decade or so. The latent demand in India and the rest of the developing world, if satisfied, just can't improve the overall rate of growth that much, because these countries make up only a quarter (or less) of the world's GDP.

From another viewpoint, economies are all about services these days, and most services are not electricity-intensive. They are also very diverse, and each individual service industry is a small fraction of the whole economy, so no one invention (or small list of inventions), electricity generation included, can have a big impact on overall growth.

(The one possible exception is the roll-out of electronic personal assistants which are at least as good as the average human PA and one-tenth of the cost, so every "knowledge worker" and personal service provider gets a good PA. We are some years away from this happening, though.)

«From another viewpoint, economies are all about services these days, and most services are not electricity-intensive.»

Slavery was not electricity-intensive either... :-)

Alternatively, if John charges Jack $1 billion for mowing his lawn, and Jack charges John $1 billion for painting his garage door, "GDP" has grown by $2 billion. Miracles of the service economy! (even Krugman has got this figured out).

Interestingly, in not so distant times 30-40% of the population (note: not of just the workforce) were house servants. With boarding ("below stairs" of course) and pocket money as compensation and two half days off a week as holidays.

In previous times perhaps 30-40% of the population (again: not of just the workforce) were "extra hands" in agriculture on the same type of compensation.

These times could soon come again in a triumph of the "service economy".

Part of the issue here is another technicality: while GDP properly defined is a list (vector) of physical quantities (the Gross Domestic Product), including things like millions of cars per year and millions of hours of teaching per year, and growing that is damn hard, sell-side Economists instead make a deliberate confusion between GDP properly defined and the nominal-GDP index, which is an index related to GDP built by the inner-product of GDP with a list (vector) of prices (weighted by "utility" in the USA by the "sell-side" friends at the BEA).

"Growing" the nominal-GDP index is a lot easier, using various "methodologies", than growing GDP properly defined as physical quantities. The latter depends *critically* on cheap fuel.

«and we have already optimized coal and fuel consumption as far as it is feasible, and the marginal fertility of coal-field and oil-field land is falling constantly. This is indeed in part made clearer by looking at the energy cost of new energy, but it goes further than that»

The "further" is the amount of energy that can be made available per hour of work.

If shovels are powered by people whose fuel is corn or maize or rice, it takes a lot of work hours to produce the amount of corn or maize or rice needed to dig a canal.

If a digger is powered by a steam engine for which the fuel is coal, it takes a lot less work hours to mine and move the coal needed to dig a canal.

If a dozer is powered by a diesel engine for which the fuel is (derived from) oil, it takes much fewer work hours to pump and transport the "oil distillate" needed to dig a canal.

That is, producing "coalfood" or "oilfood" from coal-fields and oil-fields takes a lot less work hours than the equivalent fresh food from farm-fields, which is equivalent to saying that coal-fields and oil-fields are (still) immensely more fertile for the production of "food" than farm-fields. It is hard to think of the Arabian desert as an amazingly fertile producer of "food", but it is a proper way of looking at it.

"Great Inventions" like cars, trains, airplanes, fridges, washing machines, plastics, telephones, computers, only make sense if their "food" is very very cheap and very energy dense; powering them with oxen or workers does not work that well.

I am belaboring this point because even in conversation with really knowledgeable and bright people the "Great Inventions" illusion is so ingrained that it takes time to show that they are just ways to make use of really really cheap mined "food".

Blissex wrote: "The driver of a combine harvester is more productive than 50 men with sickles not because the dozer is a "Great Invention" that is far more efficient than 50 sickles, but because the diesel powering it is far cheaper and more energy dense than the bread (and maybe cheese) used to feed the 50 men powering the sickles."

and Barkley wrote: "Producing the same old stuff at much lower real costs can provide a powerful growth stimulus, not to mention that such sources would help substantially in dealing with the climate change problem."

Ernst Gotsch talks about a no-input (except labour) type of agriculture that also ***sequests CO2 from the atmosphere:http://agendagotsch.com

This is a breakthrough in terms of financial costs, atmospheric pollution, productivity, ecosystem services and importantly in terms of the restoration of the hydrological cycle....if what he claims is true.

I do not have the precise numbers, and it is certainly true that in general there is much less electricity input to services than to manufcturing. But a lot of services seem to use computers a lot, and they use electricity. They are not completely free of electricity input. A lowering of electricity costs would presumably help services as well as manufacturing, if not by as much.